Digital monopolies

The monopolies of the 21st century are entirely different than those of the 20th century; businesses that are run on bits have different constraints and different feedback loops than those that are run on atoms.

In many cases, monopolies are well-earned and actually help the consumer: Google has the best search results, so more people use Google, giving Google more data to improve their search results. Airbnb has the most rooms available, so more people book rooms on there, making them the best place to post an available room.

The U.S. Government’s framework

So how does the U.S. Government view these newly-minted digital monopolies?

The US attitude to anti-trust law was shaped by Robert Bork, the judge whom Reagan nominated for the Supreme Court but the Senate failed to confirm. Bork’s most influential legal stance came in the area of competition law. He promulgated the doctrine that the only form of anti-competitive action which matters concerns the prices paid by consumers. His idea was that if the price is falling that means the market is working, and no questions of monopoly need be addressed. This philosophy still shapes regulatory attitudes in the US and it’s the reason Amazon, for instance, has been left alone by regulators despite the manifestly monopolistic position it holds in the world of online retail, books especially.

The United States and European Union have, at least since the Reagan Administration, differed on this point [that network effects are the foundation of digital monopolies]: the U.S. is primarily concerned with consumer welfare, and the primary proxy is price. In other words, as long as prices do not increase — or even better, decrease — there is, by definition, no illegal behavior.

Strange consequences

The above definition has some strange consequences, most notably when products are free (ad-supported) or subsidized (by investors or by other lines of business).

Google is free to consumers (because you are not the customer; you are the product). Because it is free, the price (to the consumer) of doing a search cannot increase, and therefore there cannot be illegal behavior.

Uber‘s rides are heavily subsidized by their massive venture capital investments (59% subsidized, according to Motherboard). So while Uber is undercutting other companies that don’t have the luxury of being able to burn through venture money, the cost to the consumer is reduced, so there is no illegal behavior.

A better approach

By being myopically focused on short-term consumer prices, the U.S. Government is missing the broader picture of enforcing competition in markets, which will help consumers in the long term.

For example, if Google prioritizes its own restaurant ratings above Yelp’s, that is definitely an abuse of its position and will be a long-term detriment to consumers by reducing competition within the review market. Similarly, if Uber crushes a market by essentially selling its services at a loss, that may help consumers in the short-term, but long-term will reduce competition in that market (which, of course, is exactly what Uber and its investors want).

Any anti-trust regulation and enforcement needs to be focused broadly on companies that abuse their market position by engaging in anti-competitive practices, not merely ensuring that short-term consumer prices stay level or go down.